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July 8, 2011 By A.V. Vedpuriswar

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The Budget Lingo : Revenue budget Revenue budget deals with items of a non capital nature. Revenue receipts are divided into tax and non-tax revenue. Tax revenues include income tax, corporate tax, excise, customs and other duties Non-tax revenue, includes interest on loans and dividends on investments like PSUs, fees, and other receipts for government services. Revenue expenditure is the payment incurred for the normal day-to-day running of government departments. Revenue expenditure also includes servicing interest on government borrowings, subsidies, etc. Usually, expenditures that do not create assets, and grants given to state governments and other parties are revenue expenditures. 2

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The Budget lingo : Capital budget Capital receipts are : government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, funds mobilised by small savings, provident funds, and special deposits. Capital payments are : capital expenditure on acquisition of assets like land, buildings, machinery, and equipment, investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties. 3

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Budget Lingo : Non Plan Expenditure This is generally of a non value adding type. Non-plan revenue expenditure is accounted for by : interest payments, subsidies (mainly on food and fertilisers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments. Non-plan capital expenditure mainly includes defence, loans to public enterprises, loans to States, Union Territories and foreign governments. 4

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The Budget at a glance Rs crores2009-102010-112011-12 Revenue receipts572,811783,833789,892 Capital receipts451,676433,743467,837 Total receipts1024,4871216,5761257,729 Non plan expenditure721,096821,552816,182 Plan expenditure303,391395,024441,547 Total expenditure1024,4871216,5761257,729 Revenue deficit338,998269,844307,270 Fiscal deficit418,482400,998412,817 Primary deficit205,389160,241144,831 5

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Break up of revenues/expenses Where rupee comes fromPaiseWhere rupee goesPaise Borrowings27Central plan22 Corporation tax24Interest18 Union excise11States share of taxes17 Income tax11Defence11 Customs10Other non plan exp11 Non tax revenue8Subsidies9 Service tax6Plan assistance to states7 Non debt capital receipts3Non plan assistance to states5 Total100Total100 6

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A graphical view of how the rupee comes and goes 7

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Plan Expenditure 8

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Major non plan expenditure items (Rs crores)2009-102010-112011-12 Interest213,093240,757267,986 Subsidies141,351164,153143,570 Salaries/pensions152,739150,828160,710 9

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Composition of Revenue expenditure 10

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Interest expenditure 11

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Subsidies 12

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Subsidies 13

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Tax Collection 14

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Sources of Tax revenue 15

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Tax revenue as % total tax revenue, GDP 16

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Deficit as % of GDP 2009-102010-112011-12 Revenue deficit5.23.4 Fiscal deficit6.45.14.6 Primary deficit3.12.01.6 17

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Fiscal deficit trends 18

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Structural and cyclical components of Deficit 19

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Governments market borrowings 20

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Budget highlights (1) Direct Taxes Code (DTC) proposed to be effective from April 1, 2012. Areas of divergence with States on proposed Goods and Services Tax (GST) have been narrowed. To facilitate roll out of GST, Constitution Amendment Bill may be introduced soon. However, many worry that things may not move so fast. 21

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Budget highlights (2) Government to move towards direct transfer of cash subsidy to people living BPL in a phased manner for better delivery of kerosene, LPG and fertilisers. Aadhar will play a crucial role here. From 1st October, 2011 ten lakh Aadhaar numbers will be generated per day. 22

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Budget highlights (3) Rs 40,000 crore to be raised through disinvestment in 2011- 12. Rs 2,14,000 crore allotted for infrastructure in 2011-12. This is an increase of 23.3 per cent over 2010-11. This also amounts to 48.5 per cent of total plan allocation. Allocation for social sector in 2011-12 (Rs 1,60,887 crore) increased by 17 per cent over current year. It amounts to 36.4 per cent of total plan allocation. 23

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Budget highlights (4) Total expenditure proposed at Rs 12,57,729 crore. Increase of 18.3 per cent in total Plan allocation. Increase of 10.9 per cent in the Non-plan expenditure. Fiscal Deficit brought down from 5.5 per cent in BE 2010-11 to 5.1 per cent of GDP in RE 2010-11, 4.6% in 2011-12, 3.5 per cent by 2013-14. Effective Revenue Deficit estimated at 2.3 per cent of GDP for 2010-11 and 1.8 per cent for 2011-12. Central Government debt estimated at 44.2 per cent of GDP for 2011-12. 24

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Understanding the Direct Taxes Code (1) DTC seeks to consolidate and amend the laws relating to income-tax, dividend distribution tax, and wealth tax. The aim is an efficient, effective, and equitable direct tax system which will facilitate voluntary compliance. DTC consolidates and integrates all direct tax laws and replaces both the Income Tax Act 1961 and the Wealth Tax Act 1957 with a single legislation. It simplifies the language of the legislation. It indicates stability in direct tax rates. 25

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Understanding the Direct Taxes Code (2) Currently, the rates of tax for a particular year are stipulated in the Finance Act for that relevant year. Under the Code, all rates of taxes are proposed to be prescribed in Schedules to the Code. This will obviate the need for an annual finance bill, if no change in the tax rate is proposed. The Code proposes a corporate tax rate of 30 per cent against the current effective rate of 33.2 per cent. It raises the exemption limit as well as broadens the tax slabs for personal income tax. 26

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Understanding the Direct Taxes Code (3) Deduction of up to Rs 1 lakh has been provided for investments in approved provident funds, superannuation funds, and pension funds. Direct tax rates have been moderated over the last decade and are in line with international norms. A general anti-avoidance rule assists the tax administration in deterring aggressive tax avoidance. Such general anti-avoidance rules already form a part of the tax legislation in a number of G-20 countries. 27

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Understanding the Direct Taxes Code (4) It is proposed to tax non-profit organizations set up for charitable purposes on their surplus (at the rate of 15 per cent), after allowing for accumulation of a specified proportion for creation of assets or for long-term projects, a further carry forward for receipts of the last month of the year, and also after a basic exemption limit of Rs 1 lakh. Donations to these non-profit organizations will be eligible for tax deduction in the hands of the donor. 28

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Understanding GST GST is an attempt to rationalise the indirect tax structure. But the government faces resistance from states which fear a dent in their financial autonomy if GST is implemented. The introduction of GST needs an amendment to the constitution to empower the centre to tax retail trade, give states governments the power to tax services and for setting up a council for resolving disputes. At present, the centre can tax services and goods only at the factory gate. States can tax goods only at the retail level and do not have the power to tax services. 29

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Dealing with deficits (1) The expected disinvestment proceeds of Rs. 40,000 crores in FY12 and proceeds from the revised fee structure for additional 2G spectrum can provide some relief on the fiscal deficit front. But relying on these one time sale of national assets to manage our deficits may not be the right approach. There is no clear intent to manage expenses to bring the structural deficit under control. 30

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Dealing with deficits (2) The government must undertake genuine reforms to curtail its bureaucracy spend and subsidy regime. Out of the projected government expenditure in fiscal 2011 of about 11 lakh crore rupees, 40 percent went to pay government salaries, 22 percent to interest on debt and about 10 percent to subsidies. This left a mere 30 % for the nation of which 16 % is alocated for defence and 14 % for infrastructure. 31

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Government borrowing The public debt which is almost at 75 % of GDP, with almost a third of the revenues required to service its cost, severely limits the governments fiscal flexibility. Government borrowing needs which could be about 435 lakh crore rupees combined with upward pressure on interest rates have made it difficult to push credit growth. Consistently negative real interest rates have made deposits accumulation slower. In the long run, this could affect our credit ratings making access to cheaper global capital difficult. 32